Denver to address failure of Affordable-housing effort

Denver's decade-long effort to stimulate affordable-housing development is broken, prompting a broad revamping of the plan.

The Inclusionary Housing Ordinance was designed to add hundreds, even thousands, of below-market-rate homes for Denver wage earners.

But the law has not delivered as planned. Developers have skirted the ordinance. The economy helped derail it, first from the recession and foreclosures, now from soaring property values.

"Denver's Inclusionary Housing Ordinance has failed," Mayor Michael Hancock said in his recent State of the City address. "Its unbalanced requirement of developers to provide affordable units is plagued with loopholes and inconsistencies."

In the past four years, only 15 affordable units have been added to Denver's housing inventory under the ordinance, commonly called the IHO.

City officials are reviewing the program and contemplating changes to make it more effective for developers and homebuyers alike.

"It hasn't been a resounding success," said City Councilwoman Robin Kniech, who is spearheading the revision effort. "We have failed to create affordable housing in our most high-cost areas."

The ordinance was an effort to address the problem of low- and middle-income people being unable to afford homes near their jobs. Thousands of those workers must make lengthy daily commutes because they can't afford most Denver housing.

Some changes in the IHO have been made. The Denver City Council last month approved a revision making it easier for owners of affordable units to sell or rent their homes, which carry restrictions on resales.

Future changes will focus on providing better incentives to build affordable housing and giving developers and city agencies more flexibility in the program.

"We need a more balanced approach that looks at the realities of the market," Hancock said.

The current law requires new residential developments of 30 or more units to designate 10 percent of those units as affordable — priced so that people earning less than the median income for Denver can afford mortgage payments.

In return for offering affordable prices, developers receive cash rebates of $5,500 per affordable unit from the city.

But a provision of the IHO allows developers to opt out of the regulation by making payments to Denver instead of selling homes at below-market prices.

The result: In high-demand neighborhoods with rising values such as downtown and environs, developers routinely have chosen to opt out of the program, leaving those areas with little or no affordable new housing.

Since the ordinance's launch in 2002, Denver has paid out $3.9 million in rebates and other incentives to developers. The city has collected $3.7 million from developers choosing to opt out.

The IHO applies only to for-sale units, not to rental developments.

Similar affordability programs in other cities have shown mixed results, said John McIlwain, a senior fellow at the Urban Land Institute.

"They tend to be very effective when the market is strong," he said. "It's tough to make it work in a weak market."

Early results of Denver's IHO were promising. Largely because of three major developments — Stapleton, Lowry and Green Valley Ranch — 1,004 affordable single-family homes, townhouses and condos were built in the first five years of the IHO and a related affordability mandate.

But then came the recession and, later, a wave of foreclosures. Housing development slowed drastically. Market-rate homes could be bought for the same or lower prices than designated affordable homes.

A potential big opportunity arose in recent years with a surge in downtown condo construction.

But developers of three major high-rise projects — Four Seasons, One Lincoln Park and Spire — all chose to make in-lieu payments instead of designating 10 percent of their units as affordable.

Their economic decisions were simple: It was far more advantageous to sell all their condos at high market rates and make relatively low opt-out payments to the city. The alternative — designating affordable units that sell for less than half the price of market units — could not be justified by the $5,500 rebates they would receive.

One of the few developers who have made the program work effectively in central Denver is David Zucker of Zocalo Community Development.

At his 42-unit Zocalo condominiums in Jefferson Park, west of downtown, he designated six units as affordable — roughtly two more than he was required by ordinance.

The condos sold for $130,000 to $140,000 — roughly half the cost or less than comparable market-rate units. Buyers included city workers and school teachers, "exactly the kind of buyers you want for an (affordable) policy like this," Zucker said.

But the only reasons it worked economically, he said, are that he was able to buy the city-owned land at a favorable price and he was granted a low-interest-rate city loan to supplement his construction financing.

"This is an IHO success story," he said. "But the ordinance is fundamentally uneconomic (for many developers)."

He opposed the IHO as an unworkable government mandate when it was approved in 2002, although he recognizes the need for affordable housing in Denver.

"I say hooray to the mayor for recognizing the problems with the IHO and being willing to address it," Fullerton said. "It's a community problem, and all parts of the community should be participating."

• Developers building 30 or more units must designate 10 percent of the units as affordable and price them at below-market rates. Or developers can opt out by paying fees to the city of Denver equal to half the price of the affordable units.

• Eligible buyers must have incomes ranging between 50 and 95 percent of the Denver-area median income. Income limits range from $27,800 to $87,400 depending on household size and project size.